ECON 224 1st EditionFinal Exam Study GuideThis study guide is separated into the different modules that will be covered on the Final Exam. GDP and Economic Growth Gross Domestic Product GDP- Measures the total income of everyone in the economy- GDP also measures total expenditures on the economy’s output of goods and services - For the economy as a whole, income equals expenditure because every dollar a buyer spends is a dollar of income for the seller Why is GDP Important?- GDP is used in three different wayso Explore short run fluctuations in the business cycleo Show and compare standards of living across countries Ex. US compared to European countries? o Explore long run economic growth  Overtime how has our income changed? Gross Domestic Product (GDP) Is……. the market value of all final goods and services produced within a country in a given period of time- Market value= goods are valued at their market prices so:o All goods measured in the same units (ex. dollars in the U.S.)o Things that don’t have a market value are excluded Ex. housework you do for yourself ** Anything you do for yourself does not have market value- If you pay someone else to do it, that would be included- Final goods= intended for the end usero Intermediate goods= used as components or ingredients in the production of other goods  Not the last user—if I use it to produce something else in the future not included in GDP Ex. Buy lettuce to make a salad sell the salad and charge consumer for salado GDP only includes final goods- they already embody the value of the intermediate goods used in their production- GDP includes tangible goods (like DVDs, mountain bikes, beer) and intangible services (dry cleaning concerts, cell phone service) - GDP includes currently produced goods, not goods produced in the pasto Usually a year or a quarter (3 months) - GDP measures the value of production that occurs within a country’s borders, whether done by its own citizens or by foreigners located there.Avoiding Multiple Counting - Excludes financial transactions o Public transfer payments—Welfare and Social Security Do not count any payments government makes because that is not the final use of that payment—people then take that money to buy goods and serviceso Private transfer payments—inheritanceso Stocks (and bond) market transactions - Excludes secondhand saleso Used car market: person who originally bought the car is already includedin GDP Society is not benefited by you buying a new car Reselling a car would be considered double counting o Craigslist, EBay, etc. - Excludes items produced in a previous yearo Not in given time period o Only include items produced this year—want to know how productive weare this yearMeasuring GDP- RECALL: GDP is total spending - Four components:o Consumption (C): you as a household What goods and services are YOU buyingo Investment (Ig): Capital goods—we are going to use to produce more goods and services in the future Ex. hammer for construction job—will use it to build houses in thefutureo Government Purchases (G) Cars, airplanes, President’s hair cuto Net Exports (Xn) Anything made in US consumed abroad Anything consumed in US produced abroado These components add up to GDP GDP= C+Ig+G+XnPersonal Consumer Expenditures- Total spending by households on goods and services - Note on housing costs: o For renters—consumption includes rent paymentso For homeowners—includes the opportunity cost of renting their own home (the implicit cost of their house)  Do not consume the whole benefit of the house in one monthInvestment (Ig)- Total spending on goods that will be used in the future to produce more goods - Includes spending on: o Capital equipment (machinery and tools)o Construction (factories, office buildings, HOUSES) Look at how much of the construction is done during the given year- Construction is a process that happens overtime—often takes more than a yearo Inventories (goods produced but not yet sold) - Note: “Investment” does not mean the purchase of financial assets like stocks and bonds Government Purchases (G)- All spending on goods and services purchased by the government at the Federal, State, and Local Levels- Excludes transfer payments!o Citizens will use those payments for goods and services (would double count)o Not directly purchasing goods and servicesNet Exports (Xn)- Exports—Imports- Exports represent foreign spending on the economy’s goods and services- Imports are counted in other portions of the GDP (C, I, and G) Quick Question- Does the following case effect GDP? Which Component?- Debbie spends $200 to buy her husband dinner at the finest restaurant in BostonA. ConsumptionB. InvestmentC. Government SpendingD. Net Exports Consumption—this is a household consuming a good or serviceQuick Question 2- Sarah spends $1,800 on a new laptop to use in her publishing business. The laptop was built in ChinaA. ConsumptionB. InvestmentC. Government SpendingD. Net Exports E. Net Exports and Investment Investment—She will use it to produce more in the futureNet Exports—the United States was not productive since the laptop was not made in the USQuick Question 3- Jane spends $1,200 on a computer to use in her editing business. She got last year’s model on sale for a great price. A. ConsumptionB. InvestmentC. Government SpendingD. Net Exports and InvestmentE. No Effect It would be an investment but she bought last years model so there is no effect this yearQuick Question 4- General Motors builds $500 million worth of cars, but consumers buy only $470 million worth of them A. ConsumptionB. InvestmentC. Government Spending D. Net Exports E. Consumption and Investment $470 million – consumption What happens to cars that are sitting there? --> Inventory list  Under investmentsConsumption and Investment Total Effect= $500 million—how productive US was this year The rest will sit on the lot until next year, which falls under investment Nominal GDP versus Real GDP- Inflation can distort economic variables like GDP, we have two versions of GDP: One is correct for inflation, the other is not - Nominal GDP values output using current prices o Not correct for inflation- Real GDP values output using the prices of a base yearo Soda costs 50 cents in 1983 and calculate GDP for every year before and after that year to look at how output changes o Corrected for inflationInflation -